Is US manufacturing falling off the radar?

Manufacturings muscle helped make the US a world power, but its share of national income is dwindling

These single-story structures have no smokestacks or any other indication that they are, in fact, very busy factories.

Three shifts of workers produce machines that bale hay, dig trenches, reduce tree branches to wood chips, grind stumps into sawdust, and drill tunnels to run electric wires and pipes underground.

Most were the creations of Gary Vermeer, a farmer, tinkerer and inventor who died two years ago, at the age of 91. The company he founded bears his name, but for all its American roots, the Vermeer Corp. put its newest factory — and the wealth that goes with it — not here but in the capital of China. And Vermeer’s daughter, Mary Vermeer Andringa, the chief executive, presides over a manufacturing operation that relies increasingly on government support.

As president Barack Obama urges Congress to enact a package of tax cuts and new government spending intended to revive growth and create jobs, one crucial corner of the US economy — manufacturing — has largely fallen off Washington’s radar screen.

Vermeer earns nearly one-third of its annual revenue from exports — counting on the US government for trade agreements, favourable currency arrangements and even white-knuckle diplomacy to make exports happen. In China, that wasn’t enough.

For several years, it had been running into competition from Chinese manufacturers of horizontal drills, supported by their government in the form of free land, tax breaks, cheap credit and other subsidies. With its share of the market falling precipitously, Vermeer in 2008 opened a plant in Beijing, taking a Chinese partner and drawing help for the venture from the Chinese.

“I am a very big proponent of making the US a great place from which to export,” said Andringa, 61, who is also chairwoman of the National Association of Manufacturers. But she added: “If we wanted to stay in the Chinese market, we needed to be there. That was the reality.”

Manufacturing is not simply a market activity, especially not in the 21st century: manufacturers rely increasingly on governments, here and abroad, to prosper and expand. Vermeer, family owned, thrives with such help, as do big multinationals like Dow Chemical. In each region of the world, multinationals produce much of what they sell locally. European and Asian governments support this strategy, and the US government is cautiously getting into this game.

Vermeer tries to keep manufacturing at home, employing 140 engineers, 7 per cent of its staff, in a constant effort to upgrade the various machines it exports. But it runs into an obstacle. For all the desire to make things in America, manufacturers increasingly rely on imported components, diluting the label ‘Made in America,’ and Vermeer is no exception.

“We would prefer to buy everything in the US, but some of our transmissions come from Europe,” Andringa says. “They are not made here in the sizes and capacities that we need.”

In Dow Chemical’s case, thanks to a $141 million federal grant, roof shingles that generate solar power are rolling out of a pilot plant near Dow’s headquarters in Midland, Mich., and a full-scale factory is under construction nearby. The government is also paying nearly half the cost of building a $362 million Dow plant in the Midland area, whose ‘clean’ rooms will soon produce batteries for electric cars.

Support to expand
“An advanced manufacturing policy is what this country must have,” says Andrew N Liveris, chairman and chief executive of Dow Chemical, arguing, in effect, that manufacturing needs government support to expand its dwindling share of the nation’s economy. That is particularly so when demand for new products like solar shingles and batteries is not yet enough to justify the investment.

Despite its goals for manufacturing, the administration lacks an explicit plan for achieving them. “The United States today is alone among industrial powers in not having a strategy or even a procedure for thinking through what must be done when it comes to manufacturing,” says Thomas A Kochan, an industrial economist at the Massachusetts Institute of Technology.

Manufacturing’s muscle helped make the US a world power, but its contribution to national income is dwindling. And while corporate leaders like Liveris and Jeffrey R Immelt of General Electric — who is chairman of the President’s Council on Jobs and Competitiveness — are beginning to express concern over manufacturing’s relative decline, the multinationals they command have contributed to the problem by gradually shifting production abroad. About half of Dow Chemical’s $58 billion in revenue last year came from overseas operations.

A tipping point may already have been reached. Manufacturing’s contribution to gross domestic product — roughly equivalent to national income — has declined to just 11.7 per cent last year from as much as 28 per cent in the 1950s, according to the Bureau of Economic Analysis.

It isn’t that fewer autos or plastics or steel products or electronics are coming out of US factories. Quite the contrary: output continues to rise, reaching $1.95 trillion last year. But other sectors of the economy have grown faster in recent decades, and that dynamic has reduced manufacturing’s share.

In particular, the finance, insurance and real estate sectors — driven especially by investment banking and home sales — rose from less than 12 per cent of GDP in the mid-1950s to more than 20 per cent before the onset of the financial crisis, and even now remain nearly that high. In China, in sharp contrast, manufacturing’s share of national output is more than 25 per cent. While the US has a far larger economy — $14 trillion in GDP versus China’s $6 trillion — it has less factory production.

Exactly when China took the lead, ousting the United States from a position held for more than a century, isn’t easy to pin down. The bureau says it may have come in 2009, when Chinese manufacturers generated $1.7 trillion of ‘value added’ versus America’s $1.6 trillion.

Relying on World Bank figures, some economists suggest that China moved into first place in manufacturing last year. Others say that based on measurements of actual purchasing power, the moment has not yet arrived but will come soon. It may seem remarkable that America’s fall — or impending fall — from first place in manufacturing isn’t generating all that many headlines, certainly not when compared with the controversies over the national debt or persistent unemployment.

One reason may be that the nation’s political leaders don’t see manufacturing as a problem. Put another way, they don’t necessarily regard making an engine, a computer or even a pair of scissors as having as much value as investment banking or retailing or a useful website.

But the stark reality of manufacturing’s shrinking share of national output is beginning to force these questions: Does manufacturing matter? And is the financial sector, which rose as manufacturing declined, an adequate substitute?

The financial crisis may have answered that last question with an emphatic no. Certainly, many experts maintain that manufacturing’s contribution to the national health is significantly underappreciated.